Why don't they.....

[nancylebov]

As I understand it, a big piece of the financial crisis is that no one knows which loans are good and which ones aren't. The vast majority of home loans are good, as I understand it. Some of the bad ones could be made good by renegotiating the interest down to ordinary rates.

So why isn't anyone tracing down which mortgages and parts of mortgages are in which funds, and then doing the credit checks which should have been done in the first place?

This is really valuable information. It would take a big investment to get it, but you could charge quite a bit for it, and/or save your bank with it. I think the job would get cheaper and easier as you found out who was making most of the bad loans.

So, am I just plain wrong about the situation? Or is the job too hard? Are people in the industry panicking so much they can't think? Is the industry so jammed up that no one can raise the money to get the information? Or is it so embarrassing and/or likely to impose so much legal risk that the information isn't available?

Addendum: And why isn't the government doing this? It would be a lot cheaper than the bailout.

Comments

[chickenfeet2003.livejournal.com]

I think it may be because the loans have been repackaged into incomprehensible securitized packages to the point where nobody knows who owns what or what its worth.

[metahacker.livejournal.com]

So why isn't anyone tracing down which mortgages and parts of mortgages are in which funds, and then doing the credit checks which should have been done in the first place?

Funny, I just heard words to that effect coming out of Bill Clinton's mouth, on the Daily Show last night. Coupled with "and then reduce the rates for people who could pay if things were just a bit more affordable".

[sethg]

I think the answer is what chickenfeet2003 said above--each mortgage is part of a package that may include hundreds of others, and then that package may have been split into pieces and repackaged. A homeowner who is trying in good faith to renegotiate the interest can't figure out who to negotiate with, even if such negotiations would be good for all parties involved.

Some Democrats are pushing for a provision in the bailout bill that would allow bankruptcy judges to change the mortgage terms for homeowners who declared personal bankruptcy. (Right now, the judge can change the terms for investment properties that you own, but not for your primary residence.) I think something like this is essential to unwinding the mess.

[nancylebov.livejournal.com]

Ok, negotiation is a Hard Problem. What about finding out who owns what?

[sethg]

But that's the problem. If your mortgage is caught up in this mess, then the money you put into each monthly payment will be ultimately distributed to dozens if not hundreds of investors with different levels of privilege (and therefore different levels of motivation to make a deal). From the other side, if you've invested in a collateralized debt obligation, each dividend check from the CDO is based on the revenue from dozens if not hundreds of mortgages. So there's a lot of paperwork to dig through even for a simple CDO, and for more complex derivative instruments the job becomes, well, more complex.

[bradhicks.livejournal.com]

Trust sethg_prime on this one. That really is the hard problem. In fact, I read that a couple of bankruptcy judges have been voiding mortgages altogether, letting people keep their homes for free, for just this reason: the debtor's lawyer challenges the current mortgage company to show that they own the loan, show the original paperwork, and they can't do it. It got mailed around, moved around, from bank to bank to bank to three other kinds of companies, and now nobody knows where it is. When the current debt collector receives the money, the parcel it out according to their best electronic record keeping ability to all the people who are supposed to get slices, but nobody even knows any more if they get it right.

At this point, when you buy a share in a securitized mortgage obligation, it is basically impossible to tell which mortgages are backing up this particular share in this particular fund; odds are, if you tracked it down, you'd find out it's 1/10,000th of a share each in 1000 loans. Which 1000 loans? Good luck finding out. Now, which of those 1000 loans are non-performing, and why? Even better luck finding that out. Now, who else owns the other 9,999/10,0000ths of this loan, so we can get them all together to refinance? Can't be done.

It was felt that this was irrelevant information to track because all you really needed to know was the credit score of the original borrower; as long as a CDO was packaged from people with similar credit scores, you "knew" what its payout rate would be, well enough to gamble with. It was assumed that the only reason anybody would fail to make their payments was if they lost their job or were a general deadbeat; since house prices "always go up" it was assumed that nobody in a teaser-rate loan who actually made even token payments would have any trouble refinancing.

When Warren Buffett's company took over Swiss RE way back in 2002, he set a team of forensic accountants on their CDO shares to try to figure out what the things were actually worth, based on generally accepted accounting principles. They came back months later and told him it couldn't be done. So he dumped them, 6 years ago, for pennies on the dollar and never missed them; he'd bought Swiss RE for its other assets. So seriously: the famously "smartest guy in the world" when it comes to money put a team of his best people on trying to figure out who the owners of the collateral were and what the collateral was actually worth for even a tiny fraction of the CDO shares out there, and gave up. It can't be done.

That's really what the bailout is about: resetting the game after it's become impossible to play.

[nancylebov.livejournal.com]

Thanks. I really thought that if there was someplace to send the money to and someplace to send the foreclosure notice from if the money didn't get there, there there must be records which could be traced.

But what do I know? I have a button business. The one time I had two levels of employees, it drove me crazy. I felt like I was standing on ball bearings.

The other piece of it is that I feel like I'm a slob and normal adults keep track of things. Little did I know.....

I knew that the bookkeeping for the Iraq war doesn't exist, but banking?

I wish more people had been paying attention when Buffett bailed out. However I believe he practices "dare to be boring" investing, and too many investors want drama.

I'm also thinking again about Vinge and his idea that complex societies collapse from over-control. I don't think he considered the possibility of trying to efficiently minimize the attention given to what's going on.

From one angle, what you've described sounds like satirical sf. Wish I wasn't living in the middle of it.

I feel like I should have been reading Scott Adams on confusocracy. Or possibly buying some land with a good well.

[theweaselking.livejournal.com]

I read that a couple of bankruptcy judges have been voiding mortgages altogether, letting people keep their homes for free, for just this reason: the debtor's lawyer challenges the current mortgage company to show that they own the loan, show the original paperwork, and they can't do it. It got mailed around, moved around, from bank to bank to bank to three other kinds of companies, and now nobody knows where it is.

Got a link for that?

[twistedchick]

It's a big piece -- but it's not the only big piece. Even if you could sort out who owns which part of every single one of the millions of mortgages and run tests on the mortgates to see which are good and which aren't, that's only the home mortgage market. That doesn't include commercial mortgages, industrial construction and so on -- which are a huge part of the economy as well. None of the lenders who are raking in larger interest are going to want to get less these days. Since mortgages are paid interest-first and principal-second, renegotiating all of them or re-evaluating all of them would take up-front money for the work (which would have to come out of the income the lenders get from the interest), which reduces their market value to the stockholders, among other things.

So the answer is, yes, probably it could be done; I've seen people do similar things with state-level mortgage numbers for theses. However, I don't think it's gonna fly because of the complexity of who owns what.